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Saturday, May 8, 2010

Retirement Saving Boost for India's New Pension Scheme

The Government of India has recently announced it will add a 1000 Rupees ($25) co-contribution every year for the next three years for everyone who joins the New Pension Scheme. Gautam Bhardwaj, director of Invest India Micro Pension Services (IIMPS) sees that this is likely to become a permanent subsidy, given the pressure to make the NPS a success.

Providing opportunities to the working poor to build up savings for retirement is an important public policy goal for the Government of India. The launch of the NPS is seen as playing a pivotal role in this. However, individual take-up of the scheme has been disappointing so far. One of the key obstacles to overcome is the need to incentivise individuals to go through the effort of joining and of diverting some of their current consumption towards long term savings. In this context, a number of entities such as IIMPS had been advocating the idea that the Central and State Governments should adopt a system of conditional cash transfers or co-contributions linked to retirement savings for the working poor for two key reasons: firstly, pension co-contributions can provide the working poor with a powerful financial incentive to undertake disciplined voluntary retirement savings over multiple decades, and secondly pension co-contributions can also supplement the modest savings of the working poor so that when they reach their retirement years, the value of their savings is sufficient to produce an above poverty annuity. The fact that the Government of India has now taken this on board is an encouraging sign for the future success of the NPS, although clearly, there is still much work to be done to ensure the vision is translated into reality on the ground.

The country-wide NPS itself can build on the experience gained in Rajasthan – one of the largest States in India, on developing and implementing a co-contributory social security scheme targeting the working poor. IIMPS is the turnkey implementation agency for the Government of Rajasthan’s “Viswakarma Yojana”. Under this scheme, an eligible low income informal sector worker is encouraged to open a new individual pension account on a voluntary basis and to accrete periodic savings towards his retirement into his own account. The Rajasthan Government co-contributes an identical amount into the worker's pension account subject to a maximum annual co-contribution of Rs.1000. The worker's own retirement savings, the pension co-contribution by the Rajasthan Government and the returns earned on these combined savings are reflected in the individual pension account of each worker who joins the scheme. Workers receive a periodic account statement reflecting contributions and accumulations in their pension accounts. Each individual worker then receives a pension that is dependent on the period and amount of savings and the returns earned on these savings.

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